What is Invoice Factoring?

Invoice factoring is not a loan but a sale of current invoices owed by a business’ customers to a factoring company. In exchange for these unpaid invoices, the small business receives a lump sum of cash that is then repaid when the invoice balances are collected by the factoring company.

Invoice factoring is a popular choice among small businesses with available invoices to sell because the access to funding is fast. Business factoring also provides a way to collect on invoices without the small business putting in the time or effort. While small business invoice factoring can be a viable solution to small business financing needs, there are several considerations business owners must take into account before pursuing a factoring deal.

Here are the key features you need to know about small business invoice factoring.

Companies Offering Invoice Factoring

BlueVine

BlueVine is an online lender offering several options for small business financing, including invoice factoring. Small businesses can submit an application through BlueVine’s online platform in as little as 10 minutes, and get approved within 24 hours. Factoring advances are available for up to $5 million depending on the creditworthiness of the small business.

BlueVine’s minimum requirements for eligibility include at least $100,000 in annual revenue, a minimum 530 FICO credit score, at least three months in business, and basic details about invoices from the business. BlueVine also requires that companies operate in the business-to-business (B2B) space.

Paragon Financial

Paragon Financial, a 24-year old company which provides access to capital to qualified small businesses, is another option for invoice factoring. Paragon Financial offers invoice factoring with approval and funding in as little as 24 hours, financing up to 90% of the value of invoices sold.

The lender focuses on the customers’ abilities to repay, not the small business, making approval easier than other traditional financing options. Paragon Financial requires information about the small business during the application process, including bank statements and invoice details. Small businesses operating in the B2B or B2G (business to government) space are eligible to apply online.

The Application Process

Small businesses interested in invoice factoring must submit an application to a factoring company. Through the application process, the business provides detailed information about the outstanding invoices available for sale, bank statements, and in some cases, the credit history of a business owner or the business itself.

Most applications are now submitted through an online platform from the factoring company and then quickly reviewed by the underwriting team. Once approved, a lump sum is deposited into the business bank account for use.

Benefits of Invoice Factoring

Quick Funding

The most apparent benefit of invoice factoring is the ability to get access to funding relatively quickly. An invoice factoring company can provide a lump sum payment in exchange for available invoices in a matter of days, deposited directly into the business account for use.

This is unlike traditional bank loans which can take several days to weeks to close.

Doesn’t Require Strong Credit

Additionally, invoice factoring does not require strong credit. Instead, businesses simply need accurate invoices that the company can collect on over the next 30 to 90 days.

Saves Time

Invoice factoring also benefits small businesses timewise. The factoring company takes responsibility for managing payments for outstanding invoices, so business do not have give an employee the task of collecting on outstanding invoices from customers. Most factoring companies employ highly trained professionals who understand what it takes to receive payment on an invoice, even if the original small business has had trouble collecting in the past.

No Collateral

Finally, invoice factoring does not require any collateral. Some small business loans and lines of credit require borrowers to link an asset, like real estate or equipment, to a loan to help offset the risk the lender takes on in providing funding. Invoice factoring approval does not hinge on available collateral which means small businesses are more likely to get other types of long-term financing if they need it.

Drawbacks of Invoice Factoring

Although invoice factoring is a simple solution for many small businesses in need of quick access to capital, there are some caveats.

Higher Fees

First, small business invoice factoring comes with significantly higher fees than traditional bank loans and lines of credit. The cost for an invoice factoring deal may range from 0.50% to 3%, depending on the industry of the small business and its track records of on-time payments.

For example, receiving an invoice factoring advance of $100,000 may require $3,000 in fees. Some factoring companies also charge ancillary fees, such as origination or funding fees. These expenses can add up quickly and eat away at the financing received in a hurry.

Invoices May Not be Able to be Collected

Additionally, business invoice factoring can be risky if outstanding invoices are not able to be collected. A small business may be required to buy back invoices that are left unpaid, which can be a significant and unexpected cost.

Lose Control Over Invoice Collection

Invoice factoring also means small businesses lose control over the collections process. If a factoring company is aggressive in collecting from customers, the business could earn a bad reputation and ultimately lose loyal, paying customers.

Alternative Funding Options for Businesses

Invoice factoring can be a viable option for some small businesses but merchant cash advances, small business loans, or lines of credit may be better suited for others.

A merchant cash advance is a short-term financing solution that is approved based on a company’s past cash flow. No collateral is required, nor is strong credit, so approval and funding can be swift. However, a merchant cash advance may come with high fees that make it a challenge to repay in a short period.

Another funding option for small businesses is a traditional business loan or line of credit. A small business loan from a bank or credit union is often the best choice for companies with stellar credit, an established time in business, and collateral available to back the loan. These financing options have the lowest fees and interest rates, and in some cases, the longest repayment terms for businesses that qualify. However, not all small businesses are eligible for a bank loan or line of credit, and invoice factoring or a merchant cash advance is likely a more feasible option for them.

Author: Melissa Horton

Melissa Horton has worked in financial services for the past 13 years, helping clients understand the often complex vehicles available for both lending and investment needs. She is passionate about financial literacy and strives to educate clients and the general public to empower them in making smart financial decisions.

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